On-lending (OL) operations—a form of government earmarked credit—have been widely debated in the literature, particularly in Brazil, where their quantitative relevance is substantial. This paper examines the effect of OL on a previously unexplored dimension: banks’ exposure to interest rate risk (IRR). Using a System-GMM model and a panel of 104 Brazilian bank holding companies (BHCs) from 2012 to 2021, we find that BHCs with greater reliance on OL exhibit significantly lower IRR exposure. Given the systemic nature of IRR, these findings have important implications for its allocation within the Brazilian financial system. We also test whether a higher share of OL affects bank profitability and find no statistically significant relationship. Overall, the evidence suggests that OL reduces banks’ IRR exposure without adversely affecting profitability. Results are robust across alternative specifications.
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